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previous page Previous Page: Publication 514 - Foreign Tax Credit for Individuals - How To Figure the Credit
next page Next Page: Publication 514 - Foreign Tax Credit for Individuals - How To Claim the Credit
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p514-006.htm#en_us_publink10001678

Carryback and Carryover(p22)


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Carryback and Carryover

If, because of the limit on the credit, you cannot use the full amount of qualified foreign taxes paid or accrued in the tax year, you are allowed a 1-year carryback and then a 10-year carryover of the unused foreign taxes.
This means that you can treat the unused foreign tax of a tax year as though the tax were paid or accrued in your first preceding and 10 succeeding tax years up to the amount of any excess limit in those years. A period of less than 12 months for which you make a return is considered a tax year.
The unused foreign tax in each category is the amount by which the qualified taxes paid or accrued are more than the limit for that category. The excess limit in each category is the amount by which the limit is more than the qualified taxes paid or accrued for that category.
Figure your carrybacks or carryovers separately for each separate limit income category.
The mechanics of the carryback and carryover are illustrated by the following examples.
taxmap/pubs/p514-006.htm#en_us_publink10001679

Example 1.(p22)

All of your foreign income is general category income for 2007 and 2008. The limit on your credit and the qualified foreign taxes paid on the income are as follows:
  Your
limit
 Tax
paid
Unused foreign tax (+)
 or excess limit (−) 
2007 $200 $100−100 
2008 $300 $500+200 
       
In 2008, you had unused foreign tax of $200 to carry to other years. You are considered to have paid this unused foreign tax first in 2007 (the first preceding tax year) up to the excess limit in that year of $100. You can then carry forward the remaining $100 of unused tax.
taxmap/pubs/p514-006.htm#en_us_publink10001680

Example 2.(p22)

All your foreign income is general category income for 2007, 2008, and 2009. Before 2007, all of your foreign income was in the general limitation income category. In 2004, you had an unused foreign tax of $200. Because you had no foreign income in 2002 and 2003, you cannot carry back the unused foreign tax to those years. (The carryback period for unused foreign taxes arising in tax years beginning before October 23, 2004, is 2 years.) However, you may be able to carry forward the unused tax to the next 10 years. The limit on your credit and the qualified foreign taxes paid on general limitation income for 2004–2006 (general category income for 2007, 2008 and 2009) are as follows:
  Your
limit
 Tax
paid
Unused foreign tax (+)
 or excess limit (−) 
2004 $600 $800+200 
2005 $600 $700+100 
2006 $500 $700+200 
2007 $550 $400−150 
2008 $800 $700−100 
2009 $500 $550+ 50 
You cannot carry the $200 of unused foreign tax from 2004 to 2005 or 2006 because you have no excess limit in either of those years. Therefore, you carry the tax forward to 2007, up to the excess limit of $150. The carryover reduces your excess limit in that year to zero. The remaining unused foreign tax of $50 from 2004 can be carried to 2008. At this point, you have fully absorbed the unused foreign tax from 2004 and can carry it no further. You can also carry forward the unused foreign tax from 2005 and 2006.
taxmap/pubs/p514-006.htm#en_us_publink10001681

Special rules for carryforwards of pre-2007 unused foreign taxes.(p22)


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The foreign taxes carried forward generally are allocated to your post-2006 separate income categories to which those taxes would have been allocated if the taxes were paid or accrued in a tax year beginning after 2006. Alternatively, you can allocate unused foreign taxes in the pre-2007 separate category for passive income to the post-2006 separate category for passive category income, and you can allocate all other unused foreign taxes in the eliminated categories to the post-2006 separate category for general category income.
taxmap/pubs/p514-006.htm#en_us_publink10001682

Effect of bankruptcy or insolvency.(p22)


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If your debts are canceled because of bankruptcy or insolvency, you may have to reduce your unused foreign tax carryovers to or from the tax year of the debt cancellation by 331/3 cents for each $1 of canceled debt that you exclude from your gross income. Your bankruptcy estate may have to make this reduction if it has acquired your unused foreign tax carryovers. Also, you may not be allowed to carry back any unused foreign tax to a year before the year in which the bankruptcy case began. For more information, see Reduction of Tax Attributes in Publication 908, Bankruptcy Tax Guide.
taxmap/pubs/p514-006.htm#en_us_publink10001683

Time Limit on 
Tax Assessment(p22)


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Time Limit on Tax Assessment

When you carry back an unused foreign tax, the IRS is given additional time to assess any tax resulting from the carryback. An assessment can be made up to the end of one year after the expiration of the statutory period for an assessment relating to the year in which the carryback originated.
taxmap/pubs/p514-006.htm#en_us_publink10001684

Claim for Refund(p22)


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previous topic occurrence Claim for Refund next topic occurrence

If you have an unused foreign tax that you are carrying back to the first preceding tax year, you should file Form 1040X for that tax year and attach a revised Form 1116.
taxmap/pubs/p514-006.htm#en_us_publink10001685

Taxes All Credited 
or All Deducted(p22)


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In a given year, you must either claim a credit for all foreign taxes that qualify for the credit or claim a deduction for all of them. This rule is applied with the carryback and carryover procedure, as follows.
taxmap/pubs/p514-006.htm#en_us_publink10001686

Unused taxes carried to deduction year.(p22)


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If you carry unused foreign taxes to a year in which you chose to deduct qualified foreign taxes, you must compute a foreign tax credit limit for the deduction year as if you had chosen to credit foreign taxes for that year. If the credit computation results in an excess limit (as defined earlier) for the deduction year, you must treat the unused foreign taxes carried to the deduction year as absorbed in that year. You cannot actually deduct or claim a credit for the unused foreign taxes carried to the deduction year. But, this treatment reduces the amount of unused foreign taxes that you can carry to another year.
Because you cannot deduct or claim a credit for unused foreign taxes treated as absorbed in a deduction year, you will get no tax benefit for them unless you file an amended return to reverse your choice from deducting the taxes to claiming the credit. You have 10 years from the due date of the return for the deduction year to make this change. See Making or Changing Your Choice, under Choosing To Take Credit or Deduction, earlier.
taxmap/pubs/p514-006.htm#en_us_publink10001687

Example.(p23)

In 2008, you paid foreign taxes of $600 on general category income. You have a foreign tax credit carryover of $200 from the same category from 2007. For 2008, your foreign tax credit limit is $700.
If you choose to claim a credit for your foreign taxes in 2008, you would be allowed a credit of $700, consisting of $600 paid in 2008 and $100 of the $200 carried over from 2007. You will have a credit carryover to 2009 of $100, which is your unused 2007 foreign tax credit carryover.
If you choose to deduct your foreign taxes in 2008, your deduction will be limited to $600, which is the amount of taxes paid in 2008. You are not allowed a deduction for any part of the carryover from 2007. However, you must treat $100 of the credit carryover as used in 2008, because you have an unused credit limit of $100 ($700 limit minus $600 of foreign taxes paid in 2008). This reduces your carryover to later years.
If you claimed the deduction for 2008 and later decided you wanted to receive a benefit for that $100 part of the 2007 carryover, you could reverse the choice of a deduction for 2008. You would have to claim a credit for those taxes by filing an amended return for 2008 within the time allowed.
taxmap/pubs/p514-006.htm#en_us_publink10001688

Married Couples(p23)


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previous topic occurrence Married next topic occurrence

For a tax year in which you and your spouse file a joint return, you must figure the unused foreign tax or excess limit in each separate limit category on the basis of your combined income, deductions, taxes, and credits.
For a tax year in which you and your spouse file separate returns, you figure the unused foreign tax or excess limit by using only your own separate income, deductions, taxes, and credits. However, if you file a joint return for any other year involved in figuring a carryback or carryover of unused foreign tax to the current tax year, you will need to make an allocation, as explained under Allocations Between Husband and Wife, later.
taxmap/pubs/p514-006.htm#en_us_publink10001689
taxmap/pubs/p514-006.htm#TXMP10de49ad
Figure A. Allocation Between Husband and Wife Text DescriptionFigure A. Allocation Between Husband and Wife  
taxmap/pubs/p514-006.htm#en_us_publink10001690

Continuous use of joint return.(p23)


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If you and your spouse file a joint return for the current tax year, and file joint returns for each of the other tax years involved in figuring the carryback or carryover of unused foreign tax to the current tax year, you figure the joint carryback or carryover to the current tax year using the joint unused foreign tax and the joint excess limits.
taxmap/pubs/p514-006.htm#en_us_publink10001691

Joint and separate returns in different years.(p23)


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If you and your spouse file a joint return for the current tax year, but file separate returns for all the other tax years involved in figuring the carryback or carryover of the unused foreign tax to the current tax year, your separate carrybacks or carryovers will be a joint carryback or carryover to the current tax year.
In other cases in which you and your spouse file joint returns for some years and separate returns for other years, you must make the allocation described in Allocations Between Husband and Wife.
taxmap/pubs/p514-006.htm#en_us_publink10001692

Allocations Between 
Husband and Wife(p23)


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Allocations Between Husband and Wife

You may have to allocate an unused foreign tax or excess limit for a tax year in which you and your spouse filed a joint return. This allocation is needed in the following three situations.
  1. You and your spouse file separate returns for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed a joint return.
  2. You and your spouse file separate returns for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed separate returns, but through a tax year for which you and your spouse filed a joint return.
  3. You and your spouse file a joint return for the current tax year, to which you carry an unused foreign tax from a tax year for which you and your spouse filed a joint return, but through a tax year for which you and your spouse filed separate returns.
These three situations are illustrated in Figure A. In each of the situations, 2008 is the current year.
taxmap/pubs/p514-006.htm#en_us_publink10001693

Method of allocation.(p23)


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For a tax year in which you must allocate the unused foreign tax or the excess limit for your separate income categories between you and your spouse, you must take the following steps.
  1. Figure a percentage for each separate income category by dividing the taxable income of each spouse from sources outside the United States in that category by the joint taxable income from sources outside the United States in that category. Then, apply each percentage to its category's joint foreign tax credit limit to find the part of the limit allocated to each spouse.
  2. Figure the part of the unused foreign tax, or of the excess limit, for each separate income category allocable to each spouse. You do this by comparing the allocated limit (figured in (1)), with the foreign taxes paid or accrued by each spouse on income in that category. If the foreign taxes you paid or accrued for that category are more than your part of its limit, you have an unused foreign tax. If, however, your part of that limit is more than the foreign taxes you paid or accrued, you have an excess limit for that category.
taxmap/pubs/p514-006.htm#en_us_publink10001694

Allocation of the carryback and carryover.(p23)


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The mechanics of the carryback and carryover, when allocations between husband and wife are needed, are illustrated by the following example.
taxmap/pubs/p514-006.htm#en_us_publink10001695

Example.(p23)

A Husband (H) and Wife (W) filed joint returns for 2004, 2006, and 2007, and separate returns for 2005 and 2008. Neither H nor W had any unused foreign tax or excess limit for any year before 2004. For the tax years involved, the income, unused foreign tax, excess limits, and carrybacks and carryovers are general category income (general limitation income for 2004, 2005, and 2006) are shown in Table 5.
taxmap/pubs/p514-006.htm#f15018a04

Table 5. Carryback/Carryover

Tax year20042005200620072008
ReturnJointSeparateJointJointSeparate
H's unused foreign tax to be carried back or over, or excess limit* (enclosed in parentheses)$50$25($65)$104($50)
W's unused foreign tax to be carried back or over, or excess limit* (enclosed in parentheses)$30($20)($20)$69($10)
Carryover absorbed:     
 W's from 200420W10W
 H's from 200450H
 H's from 200515H
   ″  10W
 W's from 200710W
 H's from 200750H
W = Absorbed by W's excess limit
H = Absorbed by H's excess limit
     
* General category income only
W's allocated part of the unused foreign tax from 2004 ($30) is partly absorbed by her separate excess limit of $20 for 2005, and then fully absorbed by her allocated part of the joint excess limit for 2006 ($20). H's allocated part of the unused foreign tax from 2004 ($50) is fully absorbed by his allocated part of the joint excess limit ($65) for 2006.
H's separate unused foreign tax from 2005 ($25) is partly absorbed (up to $15) by his remaining excess limit in 2006, and then fully absorbed by W's remaining part of the joint excess limit for 2006 ($10). Each spouse's excess limit on the 2006 joint return is reduced by:
  1. Each spouse's carryover from earlier years (W's carryover of $10 from 2004 and H's carryovers of $50 from 2004 and $15 from 2005).
  2. The other spouse's carryover. (H's carryover of $10 from 2005 is absorbed by W's remaining excess limit.)
W's allocated part of the unused foreign tax of $69 from 2007 is partly absorbed by her excess limit in 2008 ($10), and the remaining $59 will be a carryover to general category income for 2009 and the following 8 years unless absorbed sooner. H's allocated part of the unused foreign tax of $104 from 2007 is partly absorbed by his excess limit in 2008 ($50), and the remaining $54 will be a carryover to 2009 and the following 8 years unless absorbed sooner.
taxmap/pubs/p514-006.htm#en_us_publink10001696

Joint Return Filed 
in a Deduction Year(p24)


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previous topic occurrence Joint Return next topic occurrence

When you file a joint return in a deduction year, and carry unused foreign tax through that year from the prior year in which you and your spouse filed separate returns, the amount absorbed in the deduction year is the unused foreign tax of each spouse deemed paid or accrued in the deduction year up to the amount of that spouse's excess limit in that year. You cannot reduce either spouse's excess limit in the deduction year by the other's unused foreign taxes in that year.
previous pagePrevious Page: Publication 514 - Foreign Tax Credit for Individuals - How To Figure the Credit
next pageNext Page: Publication 514 - Foreign Tax Credit for Individuals - How To Claim the Credit
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication